Closing the Gap on Climate Finance

17 December 2010 -- To mark the final report of the UN High Level Advisory Group on Climate Change Financing (AGF), OECD Secretary-General Angel Gurría wrote an op-ed entitled “Closing the Gap on Climate Finance” for Danish business newspaper Børsen on the 7th of November 2010. The op-ed was published during the Secretary-General’s visit to Copenhagen to attend the Global Green Growth 2010 Conference and to promote our recent publication Taxation, Innovation and the Environment.

Developing countries will be hit hardest by climate change and are the least able to pay the bill. That’s why rich countries agreed during last year’s climate change summit here in Denmark to help finance their efforts to fight it. The Copenhagen Accord calls on rich countries to provide new and additional resources - USD 30 billion over the period 2010-2012 and a longer-term goal of USD 100 billion per year by 2020 from public and private sources.

Thus far, the USD 100 billion figure has been largely aspirational. But the new report from the UN High Level Advisory Group on Climate Change Financing (AGF) provides the first comprehensive analysis of the potential financing from across various different sources, and finds that it would be feasibile to mobilise the necessary funds through a range of public sources, development bank instruments, carbon market finance and private capital. This is an important step forward; demonstrating that this financing can and will be delivered is critical if we hope to build trust and co-operation between developed and developing countries and eventually reach an international “deal” on climate change.

Finding new sources of public funding won’t be easy, given the tightening of government budgets coming out of the crisis, but it is possible. The use of carbon taxes or emission trading schemes with auctioned allowances could radically boost available funds. OECD research shows that, if industrialised countries used these instruments to achieve the emissions reductions they pledged in Copenhagen, they could raise about 1% of GDP (USD $400 billion) in revenues per year by 2020 – even just a fraction of this would make a significant contribution to the financing specified under the Copenhagen Accord.

Developing and emerging economies must also rely on their own domestic finances to help them reduce emissions and cope with climate change. Market-based instruments can help to contain costs, spur innovation, and raise revenues.

Cutting subsidies that currently support fossil fuel production and consumption would have a double impact – it could help countries meet their climate and their development objectives. Some sources estimate that subsidies to fossil fuel consumption in developing and emerging economies around the world have been between USD 300-560 billion per year recently. That’s a lot of money, and unfortunately today most of it is subsidising rich people’s petrol and electricity bills rather than the needs of the poor. OECD analysis shows that removing these fossil fuel subsidies would free up precious government funds, increase economic efficiency and reduce greenhouse gas emissions by 10% in 2050 compared with business-as-usual. G20 leaders are making this win-win-win outcome a priority.

Public finance can jump-start the engine, but private investment in low-carbon infrastructure and low-carbon solutions will be needed to keep it running. Governments must give the private sector new, long-term incentives to invest in low-carbon infrastructure and technologies. New OECD research is exploring what motivates companies to step out ahead of the crowd. At a minimum, we know that public policy frameworks should help bring laggards up-to-speed, while enabling front-runners to capitalise on their efforts. Without clear policies, there is a real danger of “rollback” by the front-runner businesses.

The OECD is beginning to track low-carbon foreign direct investment and export credits, looking to see which policies most effectively – and most sustainably – boost development and address climate change. We are already tracking bilateral international climate change aid flows, where we have seen significant increases - from USD 3.9 billion in 2007 to USD 8.6 billion in 2008. Countries must push this trend further if the international community hopes to make good on its Copenhagen promises.
Armed with the most reliable data and the best-possible policies, OECD will continue to work with all countries to fund the battle against our common enemy – climate change.